Acquisitions and Dispositions

6 Months Ended

Jun. 30, 2020

ESOL

On April 6, 2020 the Company completed the previously announced acquisition of 100% of ESOL, an established waste transportation, processing and services provider with a comprehensive portfolio of disposal solutions for customers primarily across the industrial, retail and healthcare markets from Stericycle, Inc. for $438.8 million of cash consideration at closing, subject to normal working capital adjustments. In addition, as part of the acquisition, the Company entered into a non-compete agreement with Stericycle, Inc. Concurrent to the ESOL acquisition, the Company entered into an agreement with Stericycle Inc. related to certain Stericycle, Inc. customers who receive services from both ESOL and other Stericycle, Inc. businesses under a single contractual arrangement. The revenue pertaining to services rendered to these customers are invoiced centrally through Stericycle, Inc. billing systems and ESOL's portion of the revenue, less a management fee, is then distributed to the Company.

The preliminary fair value recorded for the assets acquired and liabilities assumed for ESOL is as follows:


	Preliminary Valuation
(In millions)	April 6 2020		Measurement Period Adjustments		June 30 2020
Cash and cash equivalents	$	0.4	$	—	$	0.4
Trade accounts receivable	124.1		—		124.1
Inventory	5.0		—		5.0
Other current assets	0.7		—		0.7
Property, plant and equipment	105.3		—		105.3
Right-of-use assets	56.0		—		56.0
Goodwill	152.0		—		152.0
Intangible assets	161.0		—		161.0
Other assets	0.2		—		0.2
Accounts payable	(48.6)		—		(48.6)
Accrued expenses	(17.5)		—		(17.5)
Current portion of operating lease liabilities	(16.6)		—		(16.6)
Other current liabilities	(6.4)		—		(6.4)
Environmental liabilities	(24.4)		—		(24.4)
Deferred income taxes	(15.5)		—		(15.5)
Operating lease liabilities	(39.4)		—		(39.4)
Total identifiable net assets of ESOL	436.3		—		436.3
Non-compete agreement	2.5		—		2.5
Total identifiable net assets of ESOL	$	438.8	$	—	$	438.8

The goodwill is primarily attributed to expected operational efficiencies and synergies from the expanded geographical scale of hazardous waste processing facilities resulting from combining the ESOL business with the existing Clean Earth business of the Company, as well as the value associated with the assembled workforce of ESOL. The Company expects $36.8 million of goodwill to be deductible for income tax purposes through 2030.

The following table details the preliminary valuation of identifiable intangible assets and amortization periods for ESOL and the non-compete entered into by the Company upon acquisition of ESOL:


		Preliminary Valuation
(Dollars in millions)	Weighted-Average Amortization Period	April 6 2020		Measurement Period Adjustments (a)		June 30 2020
Permits and rights	22 years	$	138.0	$	0.0	$	138.0
Customer relationships	10 years	23.0		0.0		23.0
Total identifiable intangible assets of ESOL		161.0		0.0		161.0
Non-compete agreement	4 years	2.5		0.0		2.5
Total identifiable intangible assets acquired		$	163.5	$	0.0	$	163.5

The Company valued the identifiable intangible assets using methodologies under the income approach including the multi-period excess earnings method, the distributor method, and the with-and-without method. The purchase price allocation for ESOL is not final and the fair value of intangible assets and goodwill may vary significantly from those reflected in the Company's condensed consolidated financial statements at June 30, 2020.

ESOL contributed revenue of $107.5 million and an operating loss of $1.9 million for both the three and six months ended June 30, 2020. The operations of ESOL have been combined and included as part of the Harsco Clean Earth Segment.

The three and six months ended June 30, 2020 include ESOL direct acquisition and integration costs of $17.2 million and $30.3 million, respectively, which are included in the Selling, general and administrative expenses, within the Corporate function, in the Company's Condensed Consolidated Statements of Operations. In addition to the acquisition and integration costs reflected in the Company's Condensed Consolidated Statements of Operations, the debt issuance costs associated with the issuance of debt to fund the acquisition are reflected, net of amortization subsequent to the acquisition date, as Long-term debt on the Company's Condensed Consolidated Balance Sheets.

Clean Earth

On June 28, 2019 the Company acquired 100% of the outstanding stock of Clean Earth, one of the largest U.S. providers of specialty waste processing and beneficial reuse solutions for hazardous wastes, contaminated materials and dredged volumes, for an enterprise valuation of approximately $625 million on a cash free, debt free basis, subject to normal working capital adjustments. The Company transferred approximately $628 million of cash consideration and agreed to reimburse the sellers for any usage of assumed net operating losses in a post-closing period for up to five years, the present value of which is estimated at approximately $8 million.

The fair value recorded for the assets acquired and liabilities assumed for Clean Earth is as follows:


	Final
(In millions)	June 28, 2019		Measurement Period Adjustments (a)		June 30 2020
Cash and cash equivalents (b)	$	42.8	$	(39.2)	$	3.6
Trade accounts receivable, net	63.7		(1.2)		62.5
Other receivables	0.8		1.3		2.1
Other current assets	8.7		(1.4)		7.3
Property, plant and equipment	75.6		1.4		77.0
Right-of-use assets	14.4		11.4		25.8
Goodwill	313.8		16.8		330.6
Intangible assets	261.1		(18.9)		242.2
Other assets	4.0		(2.8)		1.2
Accounts payable	(23.0)		(0.1)		(23.1)
Acquisition consideration payable (b)	(39.2)		39.2		—


Other current liabilities	(18.0)		(1.7)		(19.7)
Net deferred taxes liabilities	(51.2)		5.5		(45.7)
Operating lease liabilities	(11.1)		(8.4)		(19.5)
Other liabilities	(6.5)		(2.1)		(8.6)
Total identifiable net assets of Clean Earth	$	635.9	$	(0.2)	$	635.7

(a) The measurement period adjustments did not have a material impact on the Company's previously reported operating results.

(b) Acquisition consideration payable represents a portion of the cash consideration not paid out until July 2019.

The goodwill is attributable to strategic benefits, including enhanced operational and financial scale, as well as product and market diversification that the Company expects to realize. The Company expects $16.3 million of goodwill to be deductible for income tax purposes through 2033.

The following table details the preliminary valuation of identifiable intangible assets and amortization periods for Clean Earth:


		Final
(Dollars in millions)	Weighted-Average Amortization Period	Preliminary Valuation June 28, 2019		Measurement Period Adjustments (c)		June 30 2020
Permits	18 years	$	176.1	$	(6.0)	$	170.1
Customer relationships	8 years	33.4		(12.9)		20.5
Air rights	Usage based (d)	25.6		—		25.6
Trade names	12 years	26.0		—		26.0

Total identifiable intangible assets of Clean Earth		$	261.1	$	(18.9)	$	242.2

(c) The measurement period adjustments did not have a material impact on the Company's previously reported operating results.

(d) The Company estimates that based on current usage that the expected useful life would be 27 years.

The Company valued the identifiable intangible assets using an income-based approach that utilized either the multi-period excess earnings method or the relief from royalty method.

The three and six months ended June 30, 2019 include Clean Earth acquisition and integration costs of $12.0 million and $12.5 million, respectively which are included in Selling, general and administrative expenses in the Company’s Condensed Consolidated Statements of Operations.

Pro forma financial information

The pro forma information below gives effect to the Clean Earth acquisition as if it had been completed on January 1, 2018 and the ESOL acquisition as if it had been competed on January 1, 2019. The pro forma information is not necessarily indicative of the Company’s results of operations had the acquisitions been completed on the above dates, nor is it necessarily indicative of future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisitions and does not reflect the additional revenue opportunities following the acquisitions. The pro forma information below includes the adjustments necessary to reflect additional depreciation and amortization expense based on the estimated fair value and useful lives of intangible assets and fixed assets acquired; includes additional interest expense of approximately $4.7 million for the six months ended June 30, 2020 and $14.8 million and $29.4 million for the three and six months ended June 30, 2019, respectively,on the acquisition related borrowings used to finance the acquisitions and excludes certain directly attributable acquisition and integration costs and historic interest expense. These pro forma adjustments are subject to change as additional analysis is performed. The values assigned to the assets acquired and liabilities assumed are based on preliminary valuations, for the ESOL acquisition, and are subject to change as the Company obtains additional information during the remaining measurement period. In addition, the historical ESOL results included $8.9 million for the six months ended June 30, 2020 and $8.9 million and $17.8 million for the three and six months ended June 30, 2019, respectively, of corporate expenses charged to ESOL from Stericycle.


	Three Months Ended						Six Months Ended
	June 30						June 30
(In millions)	2020		2019		2020		2019
Pro forma revenues	$	447.3	$	564.4	$	976.8	$	1,078.1

Pro forma net income (including discontinued operations)	2.0		23.5		2.7		12.8

Harsco Industrial Segment

In January 2020 the Company sold IKG for $85 million, including a note receivable with a face value of $40.0 million (initial fair value $34.3 million), and recognized a gain on the sale of $18.4 millionpre-tax (or approximately $9 million after-tax). This disposal along with the disposals of AXC and PK in 2019, represent a strategic shift and accelerates the transformation of the Company's portfolio of businesses into a global, market-leading, single-thesis environmental solutions platform. See Note 4, Accounts Receivable and Note Receivable, for additional information related to the note receivable.

The Harsco Industrial Segment has historically been a separate reportable segment with primary operations in North America and Latin America. In accordance with U.S. GAAP, the results of the former Harsco Industrial Segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the three months ended June 30, 2020 and 2019.

Certain key selected financial information included in net income from discontinued operations for the former Harsco Industrial Segment is as follows:


	Three Months Ended						Six Months Ended
	June 30						June 30
(In millions)	2020		2019		2020		2019
Amounts directly attributable to the former Harsco Industrial Segment:
Total revenues	$	—	$	116,796	$	10,203	$	234,182
Cost of products sold	—		85,319		8,082		173,014

Income from discontinued business	(95)		9,882		123		24,074
Additional amounts allocated to the former Harsco Industrial Segment:
Selling, general and administrative expenses (e)	$	(77)	$	3,527	$	1,189	$	3,527
Interest expense (f)	—		7,005		—		11,237

(e) The Company has allocated directly attributable transaction costs to discontinued operations.

(f) The Company has allocated interest expense, including a portion of the amount reclassified into income for the Company's interest rate swaps and amortization of deferred financing costs resulting from the AXC disposal, as part of discontinued operations.

The Company has retained corporate overhead expenses previously allocated to the Harsco Industrial Segment of $1.4 million for the three months ended June 30, 2019 and $2.8 million for the six months ended June 30, 2019, as part of Selling, general and administrative expenses, on the Company's Condensed Consolidated Statements of Operations.

The following is selected financial information included on the Company's Condensed Consolidated Statements of Cash Flows attributable to the former Harsco Industrial Segment:


	Six Months Ended
	June 30
(In millions)	2020		2019
Non-cash operating items
Depreciation and amortization	$	—	$	3,301
Cash flows from investing activities
Purchases of property, plant and equipment	106		5,221